Breaking Negotiation Deadlocks: Pricing the Free Option

This article is part of the Negotiation Series.

Implicit assumptions in an argument are assumptions that are assumed true by one or more parties to the argument but not explained or proven to other parties to the argument, especially the decision makers. A simple example, used by parents against their children since time began, is: “If all your friends jumped off a building, would you do that as well?” The implicit assumption is that the friends in this case are not capable of making rational judgments and that if they are jumping off a building they must be foolish. The idea that there may be a good reason to jump is assumed away. We do not expect children to be able to identify such a subtlety. Unfortunately adults would have a hard time identifying this implicit assumption.

Moving from parenting to business, start ups often face implicit assumptions in requests from clients. At Zawya we were constantly bombarded with requests. One was Arabization of the platform. The arguments in favour were passionate. They spoke to demand in massive markets where Arabic was the dominant business language, Saudi and Egypt, as well as cultural responsibilities. The implicit assumption here was that the cost to Arabize the platform was relatively small, and that therefore our reticence to do so was neglect.

Of course, nothing could be further from the truth. We tried to make our arguments in a general manner so as not to leak sensitive information to our competitors. That didn’t work. To protect our image, we started to inform our clients what it would cost Zawya to Arabize. That made some impression but not much.

It took us a while to understand that the implicit assumption we were facing was one I now call “The Free Option.” People have this strange habit of envisioning improvements in the product or service they are receiving without envisioning a commensurate increase in price. This car would be better with an extra 50 horsepower. These economy seats would be great if I had 10 cm more of leg room. This hotel would be wonderful if it was on the beach. This house would be ideal if it had a three car garage. People all envisage how much better life is with such incremental improvements but rarely factor in that it would cost more.

Once you identify the free option that is being implicitly assumed, you then need to price it correctly in terms of cost to the proposer, in this case the client. If you present a price to yourself then the proposer will think that you are being cheap. If you present the price to the proposer then it becomes his decision. In the case of the Zawya example, we presented it as an increase to the client’s annual subscription fees. That ended the complaints quickly.

The free option is not restricted to client demand for product and service enhancements. It is often seen in partnerships, both personal as well as institutional. How many times have you been part of a project team and one or more of your colleagues does not pull his weight? The rest of the team has to then over-deliver on their part so that the project is successful. This gives the under-performing employees a free option (there is also elements of the game of chicken, but I’ll discuss that in a separate article).

So how do you price the free option in the case of an underperforming team member? In this case the option is free because it is hidden, i.e. the team may know about it but not senior management. One answer, therefore, is to make everything transparent. With clear task tracking, along with deadlines, and regular updates to senior management, the free option is removed, or at the least no longer free.

The challenge, though, is not pricing the option so much as realising that there is a free option in play. Once you realise that the option exists it becomes easy to price it and resolve it.

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